What happened
Shares of offshore drilling contractor Diamond Offshore Drilling (DO) are down 9.8% at 12:25 p.m. EST today, following the release of the company's fourth-quarter and full-year 2019 results before market open. Today's big sell-off came even after the company reported generally improved results year over year, including 9% higher revenue, 30% smaller operating losses, and $1.6 billion in contracted backlog.
Image source: Getty Images.
So what
Diamond continues to lose money -- that was expected in what remains a tough environment for offshore drillers -- but the company did show important progress in cutting those losses and growing its backlog. Diamond also generated positive operating cash flow in 2019, though at a lower rate than the prior year.
So why the sell-off? Simply put, investors remain quite negative on oil markets in general. Crude prices are down almost 2% at this writing, on a combination of fears of oversupply from global producers and worries of Chinese demand as the coronavirus outbreak continues to worsen.
Now what
Admittedly, I've been expecting offshore drilling stocks to recover for more than a year now, but persistently low oil prices, along with steadily expanding development of onshore shale oil has continued to keep offshore investment at low levels. It's another reminder that investing in energy stocks can be challenging, and requires substantial patience and willingness to be wrong.
Diamond continues to generate positive operating cash flows, even as the industry deals with a tough environment. And even though offshore spending hasn't exactly bounced back since the 2015 oil price crash, it has increased over the past year, and Diamond is one of the best run offshore contractors and should continue to win business and generate positive operating cash. Yet the market continues to treat the company as though it were about to go out of business. Shares are down more than 95% from the all-time high at this writing.
Let's be clear: This isn't a guaranteed winner as the market has continued to prove me wrong on offshore drilling over the past few years. But within that risk, I see a relevant business that is well run, selling at prices better suited for a company on the brink of bankruptcy. If you're willing to stomach the volatility that will assuredly continue with the offshore sector, and the reality that the market could continue to send its shares lower from here, Diamond Offshore looks like an excellent risk-reward investment right now.
